(Add to Favorites | View All Articles | Resource Directory)
|
|
|
Common Sources of Financing for Small Business
The choice of financing is an important determinant of whether a product reaches the market, or whether an existing business can survive. The choice of financing is an important part of being an entrepreneur and business owner, and the ability to raise cash when you have no or limited history takes skill and creativity. There are a number of sources of financing. The suitability of the alternatives depends on what stage you are at, and will change as the company matures from stage to stage. The following outlines the most typical forms available. Yourself, Family and Friends The most obvious and common start is for people to self finance. That means they either draw down on their savings or they use personal debt such as credit cards, credit lines or equity mortgages to finance their business. Family and friends are often used as a source of financing. Although they are not always in a position to properly evaluate the business venture, family and friends have long-time relationships and experience with the entrepreneur and are knowledgeable about his/her reliability and ability. Strategic Partner Strategic partners can not only provide a source of financing, but often they can provide an area of expertise that the entrepreneur does not bring to the table, such as operational or marketing skills. Naturally, the pitfall of a partner is that you do not maintain full control over the company and that sometimes there is a falling out between the partners. So it is important that you do your homework and choose your partner carefully. Angel Financing Angles tend to be freelance financers interested in loaning smaller amounts of money, say between $50,000 -$500,000. They can often provide the seed capital required to develop an idea to get to the point where a firm can obtain formal financing. Angel investors will also invest in growing companies that may have a strong revenue base, but are not yet established enough to get bank or other financing. Another benefit of Angels is that they can bring a lot of experience and industry contacts to the table. Venture Capital When firms approach venture capitalists, they are generally developed to the point where a venture capitalist can add value. The venture capitalists will generally sit on the board of directors, provide expertise and provide funding based on the attainment of milestones. They are generally interested in firms that can generate rapid growth - and returns - over a few short years; your time horizon is generally 3-8 years. Trade Credit One of the largest sources of short-tem financing, trade credit occurs whenever you purchase from a supplier but do not need to pay for the merchandise for 30 days (or whatever the terms are). Trade credit can be expensive if you are foregoing discounts, but a new firm may not have much of a choice. Factoring Factoring is also a popular source of financing for growing firms. When you generate a receivable you may sell it to a factor who will then collect the receivable for you. Typically, you will get between 75%-90% upfront for the receivable and the remainder when the factor collects, less a fee. Asset Based Lending Asset based lenders will lend to businesses that lack sufficient cash flow to support unsecured financing, but have sufficient assets that can serve as collateral. Typically, the assets are accounts receivable and inventory, but can be equipment or other similar assets. The lender relies on the assets to repay the loan, not the cash flow of the firm. Fast growing firms who cannot get sufficient financing from a financial institution will be a typical client of an asset based lender. Mezzanine Financing Mezzanine financing is subordinated debt, a type of hybrid between senior debt and equity. As Mezzanine financing is typically high risk, it can be expensive. A typical target company generally has been in business for a number of years and has an established revenue base and positive cash flow stream. Often, a company may have reached its maximum level of financing from a lending institution and will obtain mezzanine financing to bridge the gap and finance their growth. The Mezzanine financer will subordinate its debt to the main lender. Banks By the time a firm can approach a bank they usually have been in business for a couple of years, have developed solid revenue, are earning profits and have a reasonable balance sheet. The bank will provide daily operational financing as well as long-term financing. Generally the cheapest form of financing, it can also be the hardest to get. About The Author Jeff Schein is a CGA and offers advisory services in the areas of business planning, business modeling, strategic planning, business analysis and financial management for new ventures and growing small businesses. Visit www.companyworkshop.com or mailto:jeff@companyworkshop.com.
MORE RESOURCES: News provided by Yahoo! News and Google News Many small business owners favor "Buffett rule" 5 tax tips for small biz - El Paso Inc. Small business lending fund will profit taxpayers - Treasury New bills aim to strengthen small biz contracting - FCW.com Small biz acquisition as a tech talent raid strategy - ITBusiness.ca (blog) Small business owners feel pressure from new competition GetApp.com Taps Small Business Expert Denise O’Berry for Chief Editor Post |
|
|
|
RELATED ARTICLES
S Corporation - What Is It? For many small businesses, the "S" corporation is the business entity of choice. The "S" in S corporation refers to a tax designation. Why Do Franchisors have Exclusive Territories The reason we Franchisors call it an exclusive territory is because we will not sell that area again to another franchisee. That is your area to market and to conquer and to generally obtain as much market penetration as possible. If You Want to Work from Home Here are some important points to take note of if you want to work from home. working from home is a dream occupation for many people, but only a few of us will dare to trudge that path. Big Successes Never Happen Overnight Treat your business as a serious, full-time business and be serious about making it work. Put your plans on paper. Put off procrastinating until another day One of the most common issues that comes up for business owners is procrastination -wasting time, putting obstacles in the way of taking action towards goals, making excuses for delays, creating confusion/busyness etc. Procrastination is a self-defeating behavior. Looking for small business financing $37.4 million funded from venture capital today. Finding the PERFECT Alliance Partner Where do you look for the appropriate alliance?One of the most asked question is "Where do you find a good alliance partner?" It is actually fairly easy. You can find potential alliances by taking some time to research potential partners. 11 Things Small Business Owners Can Learn From Rudolph The Red-Nosed Reindeer 1. Everyone Makes A Difference - Despite not letting him play in their games, the other reindeer came to understand Rudolph's importance. Forming a Corporation - Investors You've come up with the best idea since sliced bread, figured out a business name and formed a corporation. There is, however, one small problem. Build credibility with success stories and customer testimonials -- The One Pager Shortcut Series --An effective and compelling way to market your business is through the use of success stories. What exactly is a success story? How does it market my business? How can I get started with my own success stories?Consider the following: What exactly is a success story? A success story briefly describes how your business served a client/customer and what results the client/customer achieved. Solving the Late Paying Customer Blues Nothing can drive a business down faster than customers who don't pay their bills as agreed. When you sell to customers on credit you are making an agreement with them. A Great Logo Is A Marketing Must-Have. But Is It Affordable For Small Business Owners? And is having a logo really that important?My answer to both of these questions is an emphatic YES!A logo is a graphic or visual representation of your brand. Your brand is your business, product or service and what it stands for. Asking the RIGHT Questions Which questions do you need to ask to even get a hint if you really want to know something about another person's business pain?We define business pain as a problem that a business needs to have a solution for. The pain may be that they do not have enough sales, or they do not have an appropriate process in order to track their forecasting. Entrepreneurs Go Virtual! With the massive explosion of start-ups and home businesses developing, you'll be hard pressed to not know of someone going down the entrepreneurial route. Nowadays you can set-up shop and start trading in a matter of days, and the preferred choice for the neo entrepreneur is a service called Virtual Offices. Why You Need A Virtual Assistant How much is your time really worth? Is it worth £50 an hour or £100 an hour? YOUR time is most valuable because it is your responsibility to generate new revenue for your business. Doing small and often trivial admin chores yourself does not really add value to your business and the sensible solution is to delegate those less profitable tasks by hiring someone more than capable of carrying them out, but who's hourly rate is somewhat less than your real financial worth. Genius Time? It Matters I frequently give presentations at small business gatherings, providing me the opportunity to have engaging conversations with owners about the challenges they face. Based on their input, the economy continues to plug along, heading in the right direction, and distancing itself from the difficult journey of the past few years. Small Business Server Business Tips Top 3 Ways to Maximize Your Small Business Server Consulting ProfitsOver the past 7 years, Microsoft Small Business Server (SBS) has gained traction as a widely-respected Small Business Server networking suite.As a result, many small business computer consultants, systems integrators, and value-added resellers have jumped on-board the Microsoft Small Business Server bandwagon. Is Multimedia too expensive for your business? Maybe not. Multimedia is everywhere on the Internet, whether in the form of floating ads at major websites, streaming video or animated presentations. Of course, there is a good reason why multimedia has become such an integral part of the web experience: it's an effective tool for capturing attention or provoking visitors to buy or contact the site owner. Alter the behavior of sales prospects in a positive way We're birds of a feather, public relations and small business. Wonderfully compatible and a perfect fit. Find a Small Business Guru What is a guru?A guru is a teacher. A mentor.
|
| Home | Site Map | Privacy Statement | More Articles |
| © 2006 |